The CBO Economic Outlook: High Inflation, Higher Interest Rates, Projected Federal Budget Deficit, Inflation To Last Into 2023

WASHINGTON (May 25, 2022) — The Congressional Budget Office released an economic outlook Wednesday saying that high inflation will persist into next year, likely causing the federal government to pay higher interest rates on its debt.

“CBO projects a federal budget deficit of $1.0 trillion in 2022 and an average annual shortfall of $1.6 trillion from 2023 to 2032, under the assumption that existing laws governing taxes and spending generally remain unchanged. Federal debt held by the public is projected to dip to 96 percent of GDP in 2023, but then to rise each year thereafter, reaching 110 percent in 2032, higher than it has ever been.”

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The 10-year estimates do contain positive news as this year’s annual budget deficit will be $118 billion lower than forecast last year. That’s a byproduct of the end of pandemic-related spending and the solid job growth it helped to spur. As a share of the total economy, publicly held debt will drop through 2023. Still, the accumulated federal debt will likely continue to grow over the next decade to be equal to roughly 110% of U.S. gross domestic product.

CBO expects the Federal Reserve to rapidly increase its target range for the federal funds rate over the next two years. In CBO’s projections, the interest rate on 3-month Treasury bills rises in tandem with that increase.

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The Federal Reserve has been trying to reduce inflation by raising its benchmark interest rates, causing the interest charged on 10-year U.S. Treasury notes to increase substantially in recent months. One consequence is that the government will be spending more money this year to service its debt. By 2032, the yearly interest payments will nearly be $1.2 trillion, or more than what the federal government spends on defense.

Still, the CBO cautions that its numbers “are subject to considerable uncertainty, in part because of the ongoing pandemic and other world events,” including Russia’s ongoing war in Ukraine. The report accounts at least for the first few months of the war, according to CBO.

Economists have said coronavirus relief programs issued by both the Biden and Trump administrations have contributed to higher inflation levels. But high prices have also been fueled by a delay in action by the Fed, supply chain disruptions and the tumult produced after Russia invaded Ukraine in February.

Ben Harris, the Treasury Department’s assistant secretary for economic policy, tweeted on Tuesday that the factors driving inflation also include soaring corporate profits, driven by a lack of business competition — as well as business not being fully prepared for the reopening of the economy as pandemic restrictions were lifted. The administration has emphasized that its plan put the U.S. economy into a stronger place relative to the rest of the world because unemployment is a low 3.6%.

“The American Rescue Plan has fostered an extraordinarily fast recovery and leaves us in a strong position to address the global challenges posed from supply chains and the economic fallout from Russia’s invasion of Ukraine,” he tweeted.

The report says beyond 2032, “if current laws remained generally unchanged, deficits would continue to grow relative to the size of the economy over the following 20 years, keeping debt measured as a percentage of GDP on an upward trajectory throughout that period.”

Maya MacGuineas, president of the Committee for a Responsible Federal Budget, told The Associated Press ahead of the release that the pandemic, war in Ukraine and other factors point to the importance of reducing the annual deficit.

“Unfortunately, the underlying story here is one of fiscally unsustainable positions and on top of that, we have this added challenge of inflation and a reminder that external shocks continue to come at us,” she said.

Read the CBO’s entire report here:

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Source: AP News and CBO News contributed.

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